What Is the Demand Curve?
The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis.
A demand curve won't look the same for every product or service. When the price rises, demand generally falls for almost any good, but the drop is much greater for some goods than for others. This is a reflection of the price elasticity of demand, a measurement of the change in consumption of a product in relation to a change in its price. The elasticity of demand for products varies between and within product categories, depending on the product’s substitutability.
- A demand curve is graph that shows the relationship between the price of a good or service and the quantity demanded within a specified time frame.
- Demand curves can be used to understand the price-quantity relationship for consumers in a particular market—corn or soybeans, for example.
- Except for certain less common circumstances, the demand curve slopes down, from left to right, due to the law of demand: that for the majority of goods, the quantity demanded drops as the price rises.
- Changes in factors besides price and quantity can shift a demand curve to the right or left.
Understanding the Demand Curve
The demand curve will move downward from the left to the right, which expresses the law of demand—as the price of a given commodity increases, the quantity demanded decreases, all else being equal.
Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.
For example, if the price of corn rises, consumers will have an incentive to buy less corn and substitute other foods for it, so the total quantity of corn that consumers demand will fall.
Types of Demand Curve
There are two types of demand curve: an individual demand curve and a market demand curve.
Individual demand curve
An individual demand curve is one that examines the price-quantity relationship for an individual consumer, or how much of a product an individual will buy given a particular price. Let's say the price of a slice of pizza is $1.50 and Joel is accustomed to buying four slices for lunch every workday (4 x $1.50 x 5 = $30). If the price drops to $1 a slice, four slices will cost Joel $20 (4 x $1 x 5), and Joel might demand six slices instead of four. If instead the price drops to 75 cents a slice, he might demand 8 slices a day. With the price information and the number of slices Joel will demand at that price, it would be possible to plot an individual demand curve.
Market demand curve
A market demand curve is the summation of the individual demand curves in a given market. It shows the quantity of a good demanded by all individuals at varying price points.
The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand. If a 50% rise in corn prices causes the quantity of corn demanded to fall by 50%, the demand elasticity of corn is 1. If a 50% rise in corn prices only decreases the quantity demanded by 10%, the demand elasticity is 0.2. Elasticity measures how demand shifts when economic factors change. When demand remains constant regardless of price changes, it is called inelasticity.
Elastic demand curve
The demand curve is shallower (closer to the horizontal axis) for products with more elastic demand. Goods with more elastic demand are those for which a change in price leads to a significant shift in demand. Elastic goods include luxury products and consumer discretionary items, such as a brand of candy bar or cereal. Food items are easily substituted, and brand name products are easily replaced by items that are lower in price.
Inelastic demand curve
The demand curve for items that are less elastic or inelastic is steeper (closer to the vertical axis). Inelastic goods are generally necessities, for which there are few, if any, substitutes. Common examples are utilities, prescription drugs, and tobacco products. Demand often remains constant for these items despite price changes.
Factors That Shift the Demand Curve
If a factor besides price or quantity changes, a new demand curve needs to be drawn. For example, say that the population of an area explodes, increasing the number of mouths to feed. In this scenario, more corn will be demanded even if the price remains the same, meaning that the curve itself shifts to the right (D2) in the graph below. In other words, demand will increase.
Other factors can shift the demand curve as well, such as a change in consumers' preferences. If cultural shifts cause the market to shun corn in favor of quinoa, the demand curve will shift to the left (D3). If consumers' income drops, decreasing their ability to buy corn, demand will shift left (D3). If the price of a substitute—from the consumer's perspective—increases, consumers will buy corn instead, and demand will shift right (D2). If the price of a complement, such as charcoal to grill corn, increases, demand will shift left (D3). If the future price of corn is higher than the current price, the demand will temporarily shift to the right (D2), since consumers have an incentive to buy now before the price rises.
Exceptions to the Demand Curve
There are some exceptions to the rules that apply to the relationship that exists between prices of goods and demand. Two of these are Giffen goods and Veblen goods.
A Giffen good is a non-luxury product for which there is no viable substitute—for example, a staple food, like bread or rice. In short, the demand will increase for a Giffen good when the price increases, and it will fall when the prices drops. The demand for these goods are on an upward-slope, which goes against the laws of demand. Therefore, the typical response (rising prices triggering a substitution effect) won’t exist for Giffen goods, and the price rise will continue to push demand.
Veblen goods are those for which demand rises even as the price rises because of the exclusive nature and appeal of these products as status symbols. Like the demand curve for a Giffen good, a Veblen good has an upward-sloping demand curve (in contrast to the usual downward-sloping curve). Veblen goods are generally luxury items, such as cars, yachts, fine wines, and designer jewelry, that are high quality and out of reach for the majority of consumers. It is named after American economist Thorstein Veblen, who is best known for introducing the term “conspicuous consumption.”
What Is the Law of Demand?
This is a fundamental economic principle that holds that the quantity of a product purchased varies inversely with its price. In other words, the higher the price, the lower the quantity demanded. And at lower prices, consumer demand increases.
The law of demand works with the law of supply to explain how market economies allocate resources and determine the price of goods and services in everyday transactions.
What Is the Difference Between a Demand Curve and a Supply Curve?
A demand curve represents the relationship between the price of a good or service and the quantity demanded for a given period of time. Typically, as the price rises, the demand falls; as a result, the curve slopes down from left to right. A supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given time period. Typically, as the price of a good increases, the quantity supplied also increases. The resultant curve slopes upward from left to right.
Does the Demand Curve Slope Downward or Upward?
The demand curve generally slopes downward from left to right, illustrating that as the price of a good rises, the demand for it falls. However, there are exceptions to the rule—for Giffen goods and Veblen goods, for example. In both cases, rising prices tend to accompany a rise in demand, leading to a demand curve that rises from left to right.
The Bottom Line
A demand curve is a graphic display of the change in demand of a good resulting from a change in price in a given time period. On the demand curve graph, the vertical axis denotes the price and the horizontal axis denotes the quantity demanded. A demand curve can be a useful business tool because it can show the prices at which consumers start buying less or more. It can also point out the prices at which a company can maintain consumer demand and earn reasonable profits.